The recovery in high income economies is continuing, supported by a pick-up in private consumption. With high-income private domestic demand slowly firming, rising import demand in high income economies is proving to be a signficant tailwind for developing country exports that are rebounding strongly. This has improved trade balances in several major middle-income economies, which has helped to improve their resilience during the recent bout of global financial instability.

A steady firming of private consumption in high-income economies suggests a broadening of the base for the the recovery underway. GDP breakdowns (where available) show private consumption growing at a faster pace in the US and Japan and momentum improving in the Euro Area thanks to waning policy uncertainty, easing household deleveraging and considerable monetary stimulus in place. In the US and Japan, strengthening private consumption has supported headline GDP growth at 3.2% and 1% in Q4, respectively. Confidence indicators in the United States remain at multi-year highs in the first 2 months of the 2014, suggesting that any downshift in momentum in Q1 GDP (due to extreme weather conditions) should prove temporary. The improvement in private demand is also visible in the Euro Area periphery. Earlier declines in household spending were responsible for the bulk of the (on average 4.0%) fall in GDP in Italy, Spain and Portugal since 2011. Buoyant consumer sentiment should remain supportive of business confidence in high-income economies, which, in turns, may sustain a recovery in private investment spending that has so far been lagging

Developing country exports are rebounding led by a recovery in high income and Chinese import demand. Global trade volumes rose at a 12.1% annualized pace (3m/3m saar) in December, up from a low of -1.4% last August, with developing country exports expanding at a 21.1% pace, the fastest in 9 months. The main forces behind this are the strengthening import demand in high-income economies (which grew at a 4.0% pace in December) and the still strong economic activity in China (despite a softening in GDP growth from 9.3% to 7.0% in Q4). In addition, several major middle-income economies have experienced large currency depreciations (in trade-weighted terms) over the past year that has helped improve competitiveness. The strong double-digit export rebound in Q4 in major middle-income countries, notably Philippines (46.0%), Malaysia (22.5%), Thailand (24.8%), Brazil (20.2%), South Africa (44.3%) and Indonesia (48.2%) is in turn helping to support sentiment and offset weakness in domestic demand. For instance, in Malaysia and Indonesia, rising net exports underpinned an acceleration in Q4 GDP growth to 8.6% and 6.8% (annualized) respectively.

Trade balances are improving in some middle-income countries, helping to build resilience against external financial headwinds. Merchandise trade deficits have roughly halved in recent months in India and swung back into surplus in Indonesia and Brazil – countries that had experienced intense selling pressure in currency and equity markets on concerns about domestic and external imbalances during the global financial market turmoil in mid-2013. The adjustment partly reflects stronger global demand and earlier currency depreciations. Domestic import demand has also cooled in response to policy tightening, although in India import restrictions on gold have accounted for about two-thirds of the improvement. By contrast, deficits remain large in Turkey and South Africa, where domestic policy tightening has lagged behind. Partly as a result, the Turkish lira and South African rand depreciated in the recent bout of global market instability in January (by 6.1% and 4.7% m/m), while those of India, Indonesia and Brazil were broadly stable.